Back in September 2019 we wrote an article outlining the mechanics of how we at CH administer the Request for Proposal (RFP) process with our investment providers. But what triggers the actual need to do an RFP in the first place?
The answer is twofold:
First, is any manager underperforming its peers and benchmark on a sustained two to three-year basis? If so, why and what (if anything) have they been doing to correct it? We use the rolling three-year average to keep us from making the mistake called recency bias. Anyone can be wrong in the short run, but over time the good decisions will outweigh the poor ones producing better performance and/or lower risk.
Second, is there an investment theme or idea that might enhance our portfolios that we are not currently using? This is one of the questions we continuously put to our existing partners, as well as those that would like to become our investment partners. If they build a good enough case we will look at adding that idea to our asset mix.
Perhaps it would be easiest to use examples of how each of these have happened in the recent past.
Picking a new mandate: By late 2017 the team at CH became convinced that the US equity markets were going to continue to
outperform other global equity markets. On this basis we issued an RFP in December 2017 and selected a new US-focused equity mandate that was introduced into client portfolios during our annual review meeting season in early 2018.
Replacing an existing fund: In late 2018 we identified one of our alternative strategy mandates that was no longer meeting our expectations. Based on its rolling three-year rate of return it was not living up to our standards, and the levels of risk inside the portfolio had increased. After numerous discussions with that manager lasting through early 2019 we understood that they continued to have confidence in their process and it would not be modified. We did not share that confidence and so a RFP to replace it was initiated. By mid-2019 a new fund had been chosen and it replaced the old one.
This a process we do not take lightly. We put an enormaous amount of effort into ensuring we are making the best decisions we can for our clients, and then carefully monitoring those decisions to be sure they still make sense.
If this prompts any questions as far as our portfolio construction process is concerned, we welcome your questions and feedback.
Jeremy Clark, President & CEO
& Your CH Financial Team